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The Economic Costs of the Shutdown

Joshua Roberts

By Michael Rainey

January 10, 2019

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Moody’s Investor Service said Thursday that the government shutdown poses a risk to the U.S. creditworthiness “to the extent that it disrupts the US economy,” but there’s no threat to the country’s credit rating just yet. The US government is still servicing its debt and the Treasury Department continues its borrowing-related work despite a lack of funding at the agency, Moody’s said.

If the shutdown continues, however, the economic costs will rise as a wide variety of activities are impinged upon, including “permitting and environmental reviews, import and export license processing, IPO application reviews and loans to small businesses and homeowners.” And liquidity strains could start showing up soon among entities that rely on federal funding, such as local transit agencies and small defense contractors.

Here’s the rating agency’s view of the potential effect on GDP:

“Moody's Analytics estimates that the shutdown could reduce US economic output by $8.7 billion if it persists until the end of January, shaving 0.2 percentage points off 2019 first-quarter annualized growth. Although this would have a minimal effect on our projection of 2.3% real GDP growth for 2019, the effect will be more pronounced if the shutdown continues into February and if it exacerbates recent softness in business and consumer confidence or triggers an adverse reaction by financial markets.”

Along the same lines, economists at Bank of America said that if the partial government shutdown continues, they may reduce their estimate of 2.2 percent GDP growth for the first quarter, CNBC reported.

Federal Reserve Chair Jerome Powell echoed those views Thursday during a discussion at the Economic Club of Washington, D.C., saying that a long shutdown could hurt the economy: “If we have an extended shutdown, I do think that would show up in the data very clearly.”

Previous shutdowns have been relatively short and haven’t had a big impact on overall economic growth, Powell said, but the current closure will become the longest in history if it continues until Saturday, leading the country into uncharted territory.